Volume 21 Issue 5 May 2017


The China Pakistan Economic Corridor (CPEC), which involves an extensive transportation network across Pakistan, is heralded as a ‘game-changer’ for Pakistan.
It is reported that more than $60 billion is expected to be invested in various projects across Pakistan, which will enhance the infrastructure within the country. With primary focus on the improvement and expansion of the transportation network in Pakistan, CPEC has the potential to improve regional integration of Pakistan with China and Central Asian countries as well as other South Asian countries. The modernization of the transportation network and greater regional connectivity is one of the pillars of the Pakistan Vision 2025 as per the Pakistan Planning Commission. The Asian Development Bank (ADB) notes the importance of regional cooperation and integration in its Strategy2020: The Long Term Strategic Framework of the Asian Development Bank 2008-2020. In order to determine the potential of regional integration within South Asia and the incentives multilateral organizations can offer, it is important to analyze the existing trading patterns within the region, particularly between Pakistan and India.

The South Asian Association for Regional Cooperation (SAARC), which includes Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka, was founded in 1985 to promote regional integration and economic development. It was expected that SAARC would improve economic cooperation between the member countries and generate substantial trade within the region. However, SAARC has failed to achieve its major objective. Today, the region is considered as one of the least economically integrated in terms of the total trade flow between member countries. The political disputes between the two largest economies, Pakistan and India, have made regional economic integration elusive. CPEC provides an excellent opportunity for economic integration within SAARC itself as well as to the rest of the world. It increases the connectivity of South Asia to the largest trader in the world, China and to the energy-rich Central Asian region.

The following analysis uses data from Trademap.org, UN COMTRADE and the State Bank of Pakistan (SBP). Direct data and mirror data from UNCOMTRADE is used for product-level analysis. Approximately $334 billion was exported from the SAARC member countries in 2015, which constituted 2% of global trade. This is meagre considering that more than 20% of the world population resides in this region. Approximately 80% of the exports originated from India, followed by Bangladesh, Pakistan and Sri Lanka. However, only $23 billion was traded between the member countries.

India imported $461 million from Pakistan and exported $1.59 billion to Pakistan in 2016. Researchers at ICRIER (Indian Council for Research on International Economic Relations) estimate that informal trade between Pakistan and India is twice the amount of the formal trade between the two countries.

India imported mainly vegetable products, mineral products and textile products from Pakistan. On the other hand, India exported textile products, vegetable products, chemical products and their allied products as well as plastic and petrochemical products to Pakistan.

Approximately 7% of the total cotton exports, which includes raw cotton, cotton yarn and cotton fabric, from India were destined for Pakistan in 2016. Similarly, 8% of all edible vegetables exported by India was destined for Pakistan. India exported more than $278 million worth of raw cotton to Pakistan, $76 million worth of polypropylene and $55 million worth of tomatoes. It also exported various types of cotton yarn, sugar cane, chick peas as well as organic chemicals to Pakistan. One-fifth of the total raw cotton exported by India was destined for Pakistan and more than 73% of the total tomato crop was exported by India.
On the other hand, India imported more than $100 million worth of dates and $80 million worth of Portland cement. Pakistan is an important source for dates, Portland cement, varieties of spices and raw cotton and woven fabric.
Although, both Pakistan and India mainly export consumer goods to their relatively developed and advanced trading partners, their own imports are mostly concentrated in intermediate goods and raw materials. As both countries have large agricultural sectors and a significant proportion of the workforce is employed in agro-based industries, there is potential for expansion of trade between the two countries in raw materials and intermediate goods.

Approximately 41% of the goods imported into India from Pakistan were raw materials and 31% were intermediate goods in 2016. On the other hand, 27% were consumer goods, while the rest were capital goods. The most frequently imported raw materials are dates (fresh/dried), aluminum ores, gypsum and raw cotton, all reporting more than $10 million. Similarly, Portland cement and disodium carbonate, classified as intermediate goods, are imported in larger quantities by India from Pakistan.

Some 56% of the goods exported from India to Pakistan were intermediate goods, 25% were raw materials and 14% were consumer goods. The most frequently traded raw materials were raw cotton and tomatoes (fresh or chilled). Frequently exported intermediate goods included intermediates in the plastic industry, organic chemicals, varieties of yarn made of cotton and artificial fibres, chickpeas (dried or shelled), woven fabric of synthetic material as well as vaccination for medicines for humans. Consumer goods exported by India included sugar cane, medicaments, tea, imitation jewellery, new pneumatic tyres and petroleum oils other than crude oil.

The most important manufacturing industry in terms of employment and export revenue generated, in Pakistan is the textile industry. Pakistan exports consumer goods of cotton to the United States and the European countries. It exports intermediate goods and raw materials to China and its South Asian neighbours. Pakistan produces primarily short to medium staple cotton varieties and imports longer staple cotton varieties. Textile producers in Pakistan also rely on imported varieties of man-made fibres as domestic production of such varieties is minimal. India is the second-largest producer of natural cotton and synthetic fiber in the world. India exports mainly longer staple cotton, which is used to produce higher quality textile products. Unfortunately, the trade in textile products between Pakistan and India is below its potential. Traders relying on cross-border movement of goods often face barriers such as restrictions through land borders and border holdups. Regional integration will benefit the textile producers.

The failure of Pakistan to offer non-discriminatory market access (NDMA) for Indian imports is a contentious issue between the two countries. The negative list maintained by Pakistan, which prohibits imports from India on listed items, leads to reduced formal imports from India. Although, even with such imposing restrictions, Pakistan imports from India approximately four times more than it exports to that country. Non-tariff barriers to trade, lack of custom facilitation as well as uncertainty in political relationship between the two countries inhibit cross-border trade.

Political uncertainty between Pakistan and India increases the volatility in trade patterns. Holdups and delays at the border can cause wastage and losses for traders as well as void contracts between the importers and the exporters. For instance, the recent measures that involve border closures between Pakistan and India as well as Pakistan and Afghanistan created hurdles for trade in the region.

According to a case study on the Attari-Wagah border by CUTS International (Consumer Unity & Trust Society), more than 54% of imports from Pakistan into India transited through this border in 2012-2013. On the other hand, more than 25% of exports from India into Pakistan transited through Wagah. Therefore, Wagah is an important conduit for trade between Pakistan and India and is the only currently operational land link between the majority of South Asian countries and Central Asia.

Greater regional trade integration is important for multilateral organizations such as the ADB. They must alleviate the impact of political uncertainties as well as introduce programs to compensate exporters and importers for the delays due to unexpected holdups at the border. ADB has recognized the losses attributed to the delays at border crossing points due to poor infrastructure, lack of an efficient border management system and non-availability of trade logistics facilitation at border crossing points in its project rationale for the ‘Central Asia Regional Economic Cooperation Regional Improving Border Services Project.’ It is assisting Pakistan through loans worth $250 million to modernize its land border crossings. The ADB has a major role to play in facilitating trade within the SAARC region. The aforementioned project can be a milestone towards solving one of the greatest challenges, which is the normalization of the trading relationship between Pakistan and India.

The writer is an Assistant Professor of Economics & Research Fellow at CBER, Institute of Business Administration (IBA) Karachi.
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